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2 Monarch Series The logic behind the solution The logic behind the solution Transamerica s Corporate Estate Transfer Strategy If you are a business owner generating excess cash flow or have a holding company with trapped passive assets within, The Corporate Estate Transfer Strategy can meet a critical estate planning need. By paying the cost of a corporate owned insurance policy from your company s bank account, you can significantly increase the after-tax value of your corporation for estate purposes. The strategy can: Convert your company s taxable surplus into a non-taxable surplus Grow the surplus in a taxdeferred investment vehicle Retain access to your capital for business or investment opportunities if needed Immediately enhance your estate s value Give your loved ones a substantially larger after-tax inheritance Reduce the taxable value of the business

3 Less tax and a greater legacy Each year, many Canadian corporations take advantage of the low tax rate offered by the small business deduction on the first $200,000 (soon to be $300,000) of corporate income. In many cases, this money is parked in a separate holding company ( Holdco ) that owns the shares of the operating company. This can help the operating company maintain its small business status for tax purposes, and also protect the earnings from creditors. The transfer of funds from the operating company to Holdco can often be achieved through a tax-free dividend. Unfortunately, business owners who wish to subsequently withdraw these funds for personal use will face severe tax consequences. Using an insurance strategy and special provisions of the Income Tax Act, corporate shareholders can instead transfer Holdco s trapped surplus to their estate on a tax-preferred basis, and leave a greater legacy to their beneficiaries.

4 Unlock the surplus The Corporate Estate Transfer Strategy is an effective way to minimize the tax liability when you pass your holding company to your estate. It allows you to convert the holding company s trapped surplus into a non-taxable surplus, and distribute tax-free capital dividends to your heirs. Your holding company reallocates its cash and other liquid assets into a universal life insurance policy as quickly as possible. Your advisor will recommend a premium payment time line as well as a face amount to maximize the death benefit at your life expectancy. This face amount immediately enhances your estate. The deposits the holding company makes to the policy in excess of insurance costs are invested in a portfolio that matches your investment risk profile, and can grow on a tax-deferred basis. By contrast, the passive investments that your company may currently own are taxed at rates as high as 48%, depending on your province. The life insurance policy can also reduce the value of your company for tax purposes at death. When calculating a company s fair market value for tax purposes, corporate-owned assets are generally fully reflected in the company s share value. However, only the cash surrender value of a life insurance policy is included in this calculation if you or someone with whom you do not deal with at arm s length is the insured on the policy. When your company is eventually transferred to your heirs, this conversion of fully valued assets to face amount of a life insurance policy can potentially greatly reduce the capital gains tax they will pay. The death benefit of the insurance policy is paid to your holding company tax-free. This benefit, minus the adjusted cost basis of the policy, flows into your company s capital dividend account. From there, the company can pay out tax-free capital dividends to the new Canadian-resident shareholder, the beneficiaries of your shares in the company as set out in your will. The result? A significantly more valuable after-tax estate. Weigh the alternatives When you place your trapped corporate surplus in an insurance policy, you pay the cost of insurance, and immediately receive tax-deferred investment opportunities and a guaranteed, tax-sheltered estate value. When you invest in most other assets, you pay significant tax on your investment income each year and your estate receives no particular advantageous tax treatment. If you want to maximize your estate for your loved ones, the Corporate Estate Transfer Strategy offers more value than the alternatives. Estate Value (in $ millions) Taxable Investments Pay 48%+ Corporate Tax each year on investment growth Pay up to 24% Capital Gains Tax on full value of company s assets on death Pay up to 32% Dividend Tax if cash is withdrawn from company $12 $10 $8 $6 $4 $2 0 Corporate Estate Transfer GIC Portfolio Defer tax on investment income Corporate Estate Transfer vs. GIC Portfolio Policy Year Corporate Estate Transfer Pay Capital Gains Tax on insurance policy s Cash Surrender Value only on death Withdraw Tax-Free Capital Dividends from the company on death Access additional leveraging opportunities if necessary If necessary, access value in policy with tax-efficient loans The strategy dramatically enhances your estate s value throughout the years. Estate Value at Year 36 $7,738,571 $2,165,

5 Here s How it Works: Rick and Susan are both 55 and coown RS Construction. Their retirement has already been funded through other means, and they intend for their two sons to inherit the business when they die. Rick and Susan are currently both in good health and do not smoke. They have formed a holding company, RS HoldCo, that owns 100% of the shares of RS Construction. The holding company also holds most of the surplus cash created through the operation of RS Construction. This ensures that their company remains classified as a small business, and limits the liability of RS Construction. The passive assets within RS HoldCo total $1,500,000 and are currently invested in a portfolio of Guaranteed Investment Certificates (GICs) earning 5% on average, and taxable at a rate of 48%. Step 1 Rick and Susan s holding company purchases a joint last-to-die EstateAdvantage universal life policy with a level cost of insurance and a face amount of $3,778,859 with the holding company as the named beneficiary. They transfer $150,000 from the GIC portfolio owned by RS HoldCo to the insurance policy each year for 10 years and choose an investment option that they expect will have a 4% average annual return. Step 2 36 years from now, when it is expected that both Rick and Susan will have passed away, the policy s face amount and accumulated tax-deferred cash value will create a total death benefit of $8,921,342, which would be paid to RS HoldCo. Step 3 When Rick and Susan s sons receive ownership of the shares of RS HoldCo, only the insurance policy s cash surrender value ($5,142,484) is used to calculate the Fair Market Value of the company, resulting in capital gains tax of $1,182,771. The remaining portion of the death benefit, $3,778,858, is excluded from this tax calculation. Step 4 The death benefit, minus the Adjusted Cost Basis (ACB) of the policy, flows to the capital dividend account of RS HoldCo, and the ACB portion of the death benefit could be paid out as a taxable dividend. At year 36, the ACB will be zero, meaning that the entire $8,921,342 death benefit can be distributed to Rick s and Susan s sons as tax-free dividends. With the Corporate Estate Transfer Strategy, Rick and Susan s sons would receive an estate worth $7,738,571 ($8,921,342 death benefit - $1,182,771 capital gains tax) excluding the value of any assets other than those in the holding company. In contrast, if Rick and Susan s company continued to hold a portfolio of GICs, the GICs would be worth $3,360,983 after 36 years. After subtracting capital gains tax ($773,026) on the deemed disposition of the shares of the company at death and dividend tax ($1,382,623) on the distribution, the net estate value would be $2,165,048 over 72% less than the net estate value under the Corporate Estate Transfer Strategy. Is the Corporate Estate Transfer Strategy right for you? Transamerica s Corporate Estate Transfer Strategy can provide a comprehensive estate planning solution for individuals who: own a privately held canadian corporation that holds significant cash or other liquid assets want to minimize investment and estate tax do not require these assets to fund retirement are in good health (this keeps insurance costs low) are age 50 or over Consider working with your insurance, tax, and legal advisors to fully assess the benefits of this strategy, and for assistance in determining whether it is appropriate for your circumstances. * All amounts are based on assumptions noted in the example. Actual amounts will depend on COI, premium payments, returns realized on investment options and other factors.

6 What does a pine cone have to do with life insurance? The connection is subtle yet profound. Like many things in nature, the physical design of a pine cone is influenced by a natural logic. Although it may be hidden from the eye, this underlying order helps shape the balanced results that we see. Likewise, Transamerica s Corporate Estate Transfer Strategy supplies the underlying order to create balanced financial results for our clients. Member of the AEGON Group 5000 Yonge Street Toronto, Ontario M2N 7J8 Trademarks of AEGON Canada Inc. The subsidiary companies of AEGON Canada Inc. are licensed to use such marks. Transamerica and the pyramid design are registered trademarks of Transamerica Corporation. Transamerica Life Canada is licensed to use such marks. AEGON is a registered trademark of AEGON N.V. AEGON Canada Inc. and its subsidiary companies are licensed to use such marks. LP957 7/04

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